Short term pain is long term gain for Indonesia's economy

Short term pain is long term gain for Indonesia's economy

Ahmad Pathoni, Agence France-Presse/Jakarta

A massive rise in fuel prices has resulted in short term pain for
Indonesia amid soaring inflation and jacked-up interest rates
which threaten higher unemployment and social unrest.

Analysts remain convinced however that the government's policy
of abandoning fuel subsidies will pay off over the longer term
and deliver fiscal stability for Southeast Asia's largest
economy.

David Chang, research director at Kresna Securities said
financial markets and industries would be badly hit for the next
six months by the rising costs of living before the economy
improves.

"I would think that the decision to raise fuel prices is the
correct decision," he told AFP. "Unfortunately, Indonesia has to
go through a period of hardship."

However, Chang added the overall outlook remained solid.

The government slashed fuel subsidies on Oct. 1 after its
currency was battered to a four-year low as it was sold off to
snap up dollars to pay for oil imports priced at historic highs.

Fuel prices rose an average of 126 percent as a result,
forcing hundreds of protesters onto the streets around the nation
and about 70,000 workers in the country's textile sector alone to
lose their jobs.

Benny Sutrisno, chairman of the Indonesian Textile
Association, was quoted by Antara news agency as predicting
100,000 workers will have been dismissed by the end of the year.

Protest rallies that followed the price hike were small by
Indonesian standards and came nowhere near the fevered frenzy of
1998, when ex-dictator Suharto was toppled after raising fuel
prices amid Asia's then economic crisis.

But data released last Tuesday showed that the full brunt of
an economic storm may have only just arrived, with inflation for
October clocking in at 8.7 percent from September, or 17.9
percent higher year-on-year.

This was way above expectations.

Bank Indonesia (BI) had forecast a month-on-month rise of 5.0
percent and the enormous spike prompted the central bank to
immediately hike its key interest rate by 125 basis points to
12.25 percent.

The rate was just 8.75 percent in August.

BI is also forecasting economic growth for 2005 at between 5.5
and 6.0 percent, which compares with the government's annual
growth forecast of 6.0 percent.

Song Sen Wun, a regional economist at Singapore-based CIMB-GK
Research, said the sharply higher than expected inflation number
was partly due to fuel price hikes being implemented ahead the
festive season marking the end of the Muslim fasting month of
Ramadhan.

Traditionally, this is a period when people spend-up big,
buying gifts for relatives and friends before traveling back to
their home provinces, thus adding further pressure to the
inflation figures.

"This kind of inflation is inevitable because of the big jump
in fuel costs. Certainly businesses are trying to exploit the
high fuel costs. There will be people who overcharge," he told
AFP in regards to the holy month.

He said the government had made the right decision in raising
prices and that inflation figures were still at a level the
economy could tolerate, with prices expected to ease in November
and December.

"Inflation will come off from early 2006 and the second half
of 2006, more significantly. This is short term pain for the
economy," he said.

The hike also created "a valid foundation for the economy to
rebuild" but Song cautioned the government must now deliver on
economic reform, specifically in tackling corruption and
attracting foreign investment.

Standard Chartered economist Fauzi Ichsan agreed but warned
that rising interest rates risked increasing unemployment and
poverty.

And this could outweigh the intended fiscal benefit, with the
overall impact putting a drag on economic growth, he added.

However, he was also adamant that the policy of abandoning
fuel subsidies should help the economy over the longer run.

"The fuel price increase was so steep that its impact on
prices is immediate but I expect it will be one-off and after
that inflation will fall gradually," he said.